Location Matters! Florida: $25.10/Cwt. - Upper Midwest: $19.89/Cwt.

Producer pricing in the Federal Orders is based on the USDA formulas.  All producers in an Order receive equal payment per cwt. That does not mean that all Federal Orders receive the same payment!   

Producer payment calculations are made in the Federal Orders by long standing formulas.  Once all milk Classes in the Federal Order are priced, each Federal Order then uses a weighted average of the four Classes and payment to all producers is leveled.  The weighted averages, mean that if one Order produced primarily Class I the average would be close to the Class I price.

Currently, due to the USDA formulas, Class III milk is being priced very low.  (See these posts for an explanation of the USDA formulas;  April 3, 2024: March 19, 2024: March 2, 2024)  Therefore, in Federal orders, with a lot of Class III milk, the average price will be close to the Class III average.

Below in Table I, the 11 Federal Order "Uniform" prices (really the averages) are ranked from highest paid to lowest paid.  The difference is HUGE!  These prices are for March 2024 in each Federal Order.  The states paid on the "Advanced" process are in red.

Florida, the Federal Order, with the lowest in butterfat production and the lowest in milk per cow, pays the most per cwt.  By contrast, the Upper Midwest, which has high butterfat production and high milk per cow is the lowest paid per cwt.  Producers in the Upper Midwest get paid 20% less per cwt. for their milk than producers in Florida.

So, bottom line, the Federal Order with the lowest productivity gets the highest prices per cwt.  Is this what the Federal Orders intended?  When producer payments are high, there is little incentive to improve productivity.  When producer payments are low, there is a very strong incentive to improve productivity.  That is how capitalism works.  Is the USDA payment plan defeating the power of capitalism with its pricing process.

(Table I Below was changed from the original version to represent the Uniform price based on component tests, not 3.5% butterfat.)

Table I - March 2024
Uniform Prices

WHAT MAKES THE DIFFERENCE?

Class I milk is formulated to be the highest priced Class.  When the pricing systems were developed, it was done to ensure that drinking milk would be available to all at a reasonable price.  This process was appropriate in the era when the Federal Orders were formed.  Is making sure milk is available for everyone a problem today?  Does it need USDA regulation?

In March 2024, the Class III milk index price was $16.34 per cwt. Class I milk base index price was $18.80 per cwt.  In Class I milk pricing there is an added Class I differential based on location.

Table II ranks the percent of Class I milk by Federal Order.  Florida milk marketing has 82% Class I milk.  The Upper Midwest has only 5.7% Class I milk

Table II - Percent Class I
by Federal Order

Class III rankings (Table III) are almost the exact opposite.  The Upper Midwest is the clear leader with 92% of its milk going to Class III milk for cheese.  The four Federal Orders paid by the "Advanced" process are all at the bottom.

Table III - Percent Class III
by Federal Order

With the origin of Federal Orders, Class I milk had to be Grade A milk.  All other Classes could use Grade B Milk.  Today, virtually all milk produced is Grade A.   Class I milk cannot be de-pooled, but all other Classes can be de-pooled depending on each Federal Order's rules.

SUMMARY

Strangely, none of these issues seem to on the USDA agenda for revisions.  Why should Class I milk be higher priced than other milk of equal quality?   Would producers or grocery stores quit supplying fluid milk for consumption if it was priced similar to other Classes?  If grocers did stop selling fluid milk, shoppers would go to a different store.  Fluid milk today is never delivered to the front porch of homes.  It is in the grocery stores like cheeses and ice cream.  Why is the USDA using the logic from more than half a century ago to price producer milk?

Every Dairy Producer has an Incentive to Increase Butterfat Production.

Butterfat prices remain high and milk protein prices remain low.  The high butterfat prices have opened the market to justify amino acid and other tools to maximize butterfat production.   This post will cover butterfat production in the Federal Orders paid on the "Advanced" system.  Those Federal Orders do not pay specifically for protein and represent the most difficult place to justify techniques like balancing amino acids.

The Federal Orders paid by the "Advanced" process make up only 10% of the milk marketed in the U.S. Federal Orders or about 7% of the total U.S. milk production.  Chart I is a pie chart illustrating production of Federal Order Milk.  That milk in 2023 made up 69% of U.S. milk production with 31% coming from areas not in a Federal Order or de-pooled from a Federal Order.

Chart I - Pie of Milk Marketed under the
Class and Component System and
the Advanced System 

Chart II below shows the pricing of butterfat and milk protein through March 2024.  Butterfat prices are not declining and as a result the producer value of milk protein continues to be near record lows.  (See these posts for an explanation of the USDA formulas.  April 3, 2024 ; March 19, 2024; and February 13, 2024.)

Chart II - Recent Price Trends in Butterfat
and Milk Protein

Chart III below shows the revenue from butterfat for the Southwest Federal Order which is paid by the component system.  Monthly revenue for butterfat per cow is at $269.

Chart III - Revenue per Cow for
Southwest Federal Order

The four charts below show the same data for the four Federal Orders paid on the "Advanced" system.  the current revenue per cow ranges from $197 per cow to $223 per cow.  Taking Florida as an example, if they increased butterfat component levels and milk per cow to the level of the Southwest Federal Order, the revenue increase for a herd of 1000 cows would be $864,000 per year.

Chart IV - Revenue per Cow for
Southeast Federal Order

Chart V - Revenue per Cow for
Appalachian Federal Order

Chart VI - Revenue per Cow for
Arizona Federal Order

Chart VII - Revenue per Cow for
Florida Federal Order

Why does this huge difference in revenue exist?  Tables I and II below make the difference clear.  In Table I the 11 Federal Orders are ranked in order of percent butterfat for 2023. All four for the "Advanced" Federal Orders are at the bottom of the chart with the lowest percent butterfat in their milk.

Table I - Ranking of Federal
Orders by Precent Butterfat

Chart II below lists the 11 Federal Orders ranked by monthly milk per cow.  Again, the Federal Orders paid by the "Advanced" formulas fall near to the bottom of the rankings.  The Northwest Federal Order is low in this group only because they are at the top of the list in percent butterfat.

Table II - Ranking of Federal
Orders by milk per cow

SUMMARY

There is money on the table for the "Advanced" paid Federal Orders.  The trend of increasing butterfat prices and decreasing milk protein prices continue.  (See the February 13, 2024 Post to review the 20 year trends).  Breeding and feeding technology can make a huge difference!

Producer Milk Prices are down. What States are doing best?

Producer Milk Prices are down.  Much of this comes from the Agricultural Marketing Services (AMS) price changes for butterfat and milk protein.  This post will cover the financial impact of the changes for the U.S. dairy industry and will drill down to the impact in the major milk producing states.

Chart I below quantifies the changes in the price of the major commodities used to price butterfat and milk protein.  The price of butter has consistently increased in the last five years and the price of cheese has gone down. 

Chart I - AMS Prices of Cheese and Butter

Collectively, Charts II through IV follow the revenue per cow for butterfat and milk protein over the last five years in the U.S.  They are calculated by combining component levels, milk per cow, and the AMS prices of butterfat and milk protein to calculate the monthly revenue per cow.  

Chart II tracks the monthly revenue of butterfat per cow.  Over the last five years, the value of butterfat dropped and then increased significantly.  The current butterfat revenue per cow reached a new record high.  In 2020, prices of butterfat declined largely influenced by the COVID "stay at home" policies.  In 2021 they recovered and then continued to increase to record highs.  In 2023, butterfat value per cow leveled off but remains near record levels.

Chart II - U.S. Producer Revenue per Cow for Butterfat

Chart III follows the revenue of milk protein per cow.  It is the inverse picture of butterfat value in Chart II.  It reached highs in 2021 and is at near record lows in 2024.  The reason for the inverse relationship is the impact of the USDA protein pricing formula covered in the prior post.  As butterfat prices increase, the value of milk protein decreases.

Chart III - U.S. Producer Revenue per  Cow for Milk Protein

Chart IV shows the combined value of butterfat and milk protein per cow.  They declined in 2023 but are still well above the January 2019 values.  The increase from the start of 2019 to the high in 2023 is a 55% increase.  The increase from the start of 2019 to February 2024 is 26%.  While the value of butterfat and milk protein has dropped in 2023, it is still well above 2019 prices.  The 2023 drop in value is 19% which has led to many articles about the drastic drop in producer milk prices.  However, the prices are in line with the long revenue trends.

The drastic price drop in 2023 will likely accelerate the long-term trends of fewer small dairy producers and increased large herds which have economic advantages of their size.

Chart IV - U.S. Combined Revenue per cow for
Butterfat and Milk Protein.

Below is the revenue per cow financial impact on three of the largest milk producing states.  All show the same general up and down revenue trends, but the amount of swings and the total revenue are significantly different.

Monthly California butterfat and protein prices per cow are now just 4% higher than the beginning of 2020.  Twelve-month moving average data for 2019 is not available, as California did not become a Federal Order until the end of 2018

Chart V - California Producer Revenue per Cow for
Butterfat and Milk Protein

Wisconsin's current revenue per cow for butterfat and protein is 27% higher in February 2024 compared to the start of 2019 (Chart VI).  The value peaked at a 55% increase in December 2022.  The current pricing is in line with long-term trends.

Chart VI - Wisconsin Producer Revenue per Cow for
Butterfat and Protein

Texas's current revenue per cow is 28% higher than the start of 2019.  It peaked with a 59% increase in January 2023.

Chart VII - Texas Producer Revenue per Cow for
Butterfat and Protein

The table below shows the February 2024 revenue per cow for three of the major dairy producing states covered in the three charts above.  They range from $388 per cow per month to $362 per cow per month, a 7% difference.  For a herd of 1000 cows for a year, that is a herd revenue difference of $312,000 per year.

Table I - Butterfat and Protein
Revenue per Cow

What makes the difference in revenue per cow?  Table II compares the parameters that influence revenue per cow of the three large states.  Texas, which had the highest revenue per cow, and was highest in two of the parameters. Wisconsin was highest in one category.  The parameters of high components and milk per cow lead to high milk revenue per cow.

Table II - Parameters that Lead to High Revenue per Cow

SUMMARY

Being a milk producer in the U.S. can be financially volatile.  Maximizing component levels and milk per cow has a strong influence on revenue.  There are multiple methods such as balancing amino acids in diets that are used to maximize the parameters shown in Table II.  Survival and financial success depends on using all the tools.

The next post to this blog will cover an analysis of maximizing revenue in areas paid on the "Advanced" system where payment for butterfat exists, but not for protein.  Can they benefit financially by increasing butterfat levels and milk per cow?